Commentary: Beyond COVID-19, health-care investing will be forever changed

Full hospital beds, overwhelmed medical staff and a health-care system stretched to the brink — I saw the darkest days of the pandemic through the eyes of my husband, an emergency room physician who treated his first COVID-19 patient in early March 2020. As a research analyst and portfolio manager covering the health-care sector, I believed that prospects for quick relief were dim. It typically took a decade to discover a compound, go through clinical trials, get Food and Drug Administration approval and eventually get to market with a new drug. To my surprise, my husband received his first dose of the COVID vaccine a mere 10 months later.

The rapid development of the COVID-19 vaccine is just one example of how the pandemic has impacted the health-care industry. In fact, in my 20 years as a health-care analyst, I have never seen a period like the last 18 months in terms of scientific innovation and business model evolution.

This transformation couldn't come at a more opportune time as a new health-care crisis is looming. Currently, 10,000 Americans are aging into the Medicare system every day. By the year 2030, every baby boomer will be over the age of 65 and 1 out of every 5 Americans will be of retirement age. By 2035, according to the U.S. Census Bureau, there will be more elderly Americans than children under 18 for the first time in U.S. history. This "graying of America"— a trend similar in many other developed nations — could quickly place more demand on health care than there is supply.

However, I have seen many developments over the past year that have convinced me the health-care sector will continue to grow, innovate and meet the higher demand. And just as COVID-19 accelerated the digital economy by five to 10 years, it has accelerated the scientific and medical economy as well.

In fact, many innovative companies — especially in the biotech/pharma and life science and tools areas — have yet to unlock their full potential because they continue to focus their resources on COVID-19. Similarly, many medical device and health-care service companies face near-term challenges because elective procedures and doctor office visits have not recovered to their pre-COVID levels. As we come out of the pandemic, each of these industries, and more specifically many of these platforms, can focus on other unmet medical needs and therapeutic areas. And these markets — e.g., oncology, autoimmune, rare disease — are enormous. We see investment opportunities in innovative drug, device and service companies that are improving the ability to diagnose and treat disease, provide better access to care, lower costs and generate better clinical outcomes.

Why did some of those with COVID-19 have severe symptoms, while others appeared to be entirely healthy?

The fact that not all people respond the same way to drugs and therapies has been one of the biggest mysteries of modern medicine. But the pandemic has significantly ramped up research and development to understand those unique differences — particularly at the single cell level, in which researchers can examine an individual's DNA, RNA and proteins for markers that might point toward more personalized treatment. This includes vaccines that can transform our own bodies into a production facility for antibodies — or, as many hope eventually, cancer-fighting agents.

This approach to treating disease at the cellular level may cause some anxiety but, over time, the effectiveness of these cell- and gene-based therapies will likely make many patients more receptive and comfortable. As investors, we focus on 1) the biotech companies with these types of innovations and 2) life science and tools companies that make equipment and reagents used by researchers to better understand our own biology. We see significant potential in this area. The study of genetics, single cell analytics and proteomics can lead to breakthroughs in the treatments of infectious diseases, autoimmune disorders and cancer.

While much attention over the past year has been focused on the big-name COVID-19 vaccine manufacturers such as Pfizer Inc., a whole supply chain of tools and service providers will help reinvent drug discovery and development.

Many companies behind the creation of the COVID-19 vaccine were lesser-known upstarts, like Moderna Inc. and Germany-based BioNTech SE. This represents a new trend. Historically, most of the breakthroughs happened within large pharma companies. Today, much of the cutting-edge innovation is happening within small and emerging biotechs.

How do these smaller players compete with the industry leaders? By outsourcing research and development, clinical trials and manufacturing to contract research organizations, or CROs, and contract development and manufacturing organizations, or CDMOs. These companies are not just low-value order takers — they are full partners in the process, providing valuable services at a time when speed and flexibility are of utmost importance.

As investors, we are very interested in these CROs and CDMOs because they offer potential exposure to revolutionary treatments and drugs that meet growing needs in the health-care system. Specifically, we have looked for companies that have differentiated offerings in running clinical trials or specialize in manufacturing cell and gene therapy drugs.

Screenings for breast cancer and colon cancer fell sharply during the early days of the pandemic — down between 86% and 94% in March 2020, according to Epic Systems Corp., an electronic medical records vendor. We believe pent-up demand for screening tests will drive revenues for diagnostic companies higher in 2022, offering an opportunity for investors.

We are also interested in companies that are pursuing the next generation of diagnostics. For example, new tools may soon allow for annual cancer screenings through a simple blood draw rather than timely, expensive and invasive procedures.

Telemedicine and digital health apps rose to prominence during COVID-19 at a time when visiting the doctor in person was a frightening prospect. Despite an inevitable deceleration in app usage as the economy has reopened, these services are a critical part of our health-care future.

When the world shut down due to the pandemic, patients were told to stay out of medical facilities. But even as doctors' offices are reopening, some people remain unenthusiastic about physical visits. Many patients today feel perfectly comfortable having intimate discussions over video with nurses and doctors, who can provide care and prescribe medications remotely.

Sicker, chronically ill patients can now get better tools to manage their diabetes, hypertension and weight. Companies offer medical devices that connect through Bluetooth or the Internet of Things, allowing patients and their physicians to collect and evaluate health data (for example, their blood pressure or blood glucose levels). This data empowers patients to help manage their own health.

The biggest impact of digital health care may be on mental health. The pandemic has increased behavioral therapy needs, and virtual therapy may actually be favored by patients who value privacy. Several virtual health apps use AI algorithms to better match providers with patients and, in some cases, help people do self-care.

We have been looking closely at emerging growth companies that offer these services most effectively, which in some cases will be a hybrid of virtual, self-help and in-person approaches. There are several ways for investors to gain exposure to this theme, such as through companies that coordinate care, provide telemedicine and leverage wearable technology.

Whatever the future holds, the models established during the pandemic provide a new foundation for solving the biggest threats to human health. COVID-19 placed many stresses on our society and communities, but it also showed that we can unleash the power of the global scientific community. The possibilities are endless.

Sheetal Prasad is a managing director and small-cap core and midcap growth portfolio manager at Jennison Associates LLC, based in New York. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.